Friday, April 04, 2008
10:25 AM

On April 4th the Bureau of Labor Statistics (BLS) released the March Employment Report. Here is a synopsis of that report.

The unemployment rate rose from 4.8 to 5.1 percent in March, and nonfarm payroll employment continued to trend down (-80,000), the Bureau of Labor Statistics of the U.S. Department of Labor reported today. Over the past 3 months, payroll employment has declined by 232,000. In March, employment continued to fall in construction, manufacturing, and employment services, while health care, food services, and mining added jobs.

Unemployment Rate

Household Data

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Last month the unemployment rated dipped by .1% from 4.9% to 4.8% based on 374,000 workers dropping out of the labor force (and are thus no longer considered unemployed). This month, 225,000 workers were added back in and the unemployment rate soared. Even still, only a portion of those workers were added back in. It is likely unemployment is understated even by the BLS's own suspect reporting.

Jobs Required To Keep Pace With Growing Labor Force

The following chart is thanks to VisionsFromSpace.Data for the chart came from the BLS.

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The above chart shows the economy needs to create 150,000 jobs a month just to keep up with population growth. Over the past 3 months the economy has lost 232,00 jobs.

Establishment Data

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The establishment data was an absolute disaster.

Highlights

51,000 construction jobs were lost

48,000 manufacturing jobs were lost

12,000 retail trade jobs were lost

35,000 professional services jobs were lost

18,000 government jobs were added

A whopping 93,000 goods producing jobs in total were lost (higher paying jobs), and even the lower paying service providing jobs such as those at Wal-Mart (WMT), Pizza Hut (YUM), Target (TGT) etc, provided a net gain of a mere 13,000 jobs.

It should not be long now before even the service sector starts to contract. Wal-Mart has canceled many stores and so have other retailers. Consumers are shopping and eating out less. More layoffs are coming. No one should be denying that we are in a recession now.

Birth/Death Model

This was a very weak jobs report. But it is even worse when one looks at Birth/Death Model assumptions.

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The BLS should be embarrassed to report this data. Its model suggests that there was a net jobs of 28,000 coming from construction businesses, 44,000 jobs coming from leisure and hospitality, and a whopping 142,000 jobs in total coming from net new business creation.

Virtually no one can possibly believe this data. The data is so bad, I doubt those at the BLS even believe it. But that is what their model says so that is what they report. Just as there is mark to model in the investment world, there is mark to model in the BLS world.

BLS Black Box

For those unfamiliar with the birth/death model, monthly jobs adjustments are made by the BLS based on economic assumptions about the birth of death of businesses (not individuals). Those assumptions are made according to estimates of where the BLS thinks we are in the economic cycle. The BLS will not disclose what their methodology is or even on what it is based. Essentially it is a "black box" with the BLS essentially saying "trust us, we know what we are doing".

The BLS has admitted however, that their model will be wrong at economic turning points.

The latest birth/death numbers appear to be from Mars, Pluto, or France. With housing falling like a rock and homebuilders demanding concessions from contractors, the BLS is assuming that 28,000 new jobs were added in construction and 7,000 new jobs in manufacturing. With subprime lenders blowing up everywhere (going out of business) the BLS is assuming 6,000 new jobs were added in financial activities. The total number of jobs added by such assumptions for February was 142,000 jobs.

No doubt you will see some who will subtract 142,000 jobs from -80,000 jobs and conclude that 222,000 jobs were lost as opposed to the reported loss of 80,000 jobs. Such math is inaccurate because the establishment numbers are seasonally adjusted and the birth/death assumptions are not and one cannot simply add the two together and come up with an accurate total.

Here is the pertinent snip from the BLS on Birth/Death Methodology.

The net birth/death model component figures are unique to each month and exhibit a seasonal pattern that can result in negative adjustments in some months. These models do not attempt to correct for any other potential error sources in the CES estimates such as sampling error or design limitations.

Note that the net birth/death figures are not seasonally adjusted, and are applied to not seasonally adjusted monthly employment links to determine the final estimate.

The most significant potential drawback to this or any model-based approach is that time series modeling assumes a predictable continuation of historical patterns and relationships and therefore is likely to have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.

The important point in this mess is that both the job data and employment data are much worse than appears at first glance (and the first glance looked horrid).

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look

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If you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, etc., you get a closer picture of what the unemployment rate is. The official government number is 5.1% but Table A-12 suggests it is closer to 9.1%. I believe that is on the low side.

Regardless, the trend in unemployment is now clear, it is rising sharply. Expect to see 6% this year. This report was a disaster.

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